Spectrum Brands Holdings, Inc.

Good day and thank you for standing by. Welcome to the Spectrum Brands Fiscal Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Faisal Qadir, VP of Strategic Finance and Enterprise Reporting. Please go ahead.

Thank you. Welcome to Spectrum Brands' fiscal third quarter 2022 earnings conference call and webcast. I am Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we've placed a slide presentation on the event calendar page in the investor relations sections of our website, at www.spectrumbrands.com. This document will remain there following our call. Starting with slide two of the presentation, our call will be led by David Mora, our Chairman and Chief Executive Officer, Jeremy Smeltzer, Chief Financial Officer, and Randy Lewis, our Chief Operating Officer. After opening remarks, we will conduct the Q&A. Turning to slide three and four, Our comments today include forward-looking statements, which are based upon management's current expectations, projections, and assumptions, and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 12, 2022, our most recent SEC filing, and Spectrum Brands Holdings' most recent annual report on Form 10-K, and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statements. Also, please note we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filings, which are both available on our website in the Investor Relations section. I will now turn the call over to David Mora.

Hey, thanks, Vessel. Good morning, everybody, and welcome to our third quarter earnings update. I want to thank all of you for joining us this morning. I'm going to kick today's call off with a discussion on the company's strategic initiatives. Then I'll give an update on the current financial performance and the operating environment we are currently experiencing. Jeremy will then give a more detailed financial update, followed by Randy's operational update with more detailed business unit results. If I could start with slide six and our strategic initiatives. We continue to execute on our objective to close on the $4.3 billion sale of our HHI business to Asa Abloy. While this deal has taken longer than originally expected, both parties are confident and committed that we will close this transaction, and we are prepared to do what it takes to effectuate this deal. We strongly believe this is a great deal for consumers as it will foster more innovation, quality, and value and bring increased competition to the industry. Once completed, we will use the proceeds to completely recapitalize our company, pay down debt, and materially strengthen our balance sheet. HHI continues to perform well, and we expect that to continue into the fourth quarter. I'd like to take a moment to thank Tim Goff, and our HHI team for maintaining not only their focus and strong operating performance in the industry, but also recently winning new business, all the while dealing with the current sales process. Very grateful to this team. Additionally, we have accelerated the integration of our TriStar acquisition into our home and personal care appliance business, which has been renamed Empower Brands, and recently completed the internal carve-out work necessary to separate this business either through a spinoff or another transaction in fiscal 2023. These actions further our strategic objective of recasting our company into a pure play global pet and home and garden business. Now turning to the financial performance and our operating environment. Once again, we delivered top line growth this quarter. Our total sales increased 10% while organic sales, excluding the impact of FX and acquisitions, increased 4.4%. While we entered the third quarter with optimism, having implemented the necessary pricing actions to restore our margin structure and to begin to ramp up our EBITDA generation for a big rebound in our back half, we experienced two significant points of pressure during the quarter. The first was, Many of our retail customers communicated to us that they were experiencing rapidly changing consumer behavior, particularly in home appliances, as well as reduced foot traffic in the home center channels. They also indicated that their inventory positions were as much as 30% to 40% higher than year-ago levels and that they were going to curtail replenishment orders and, in some cases, cancel orders altogether. The second was we continued to experience challenging weather conditions in our home and garden business, which negatively impacted consumer demand and retailer replenishment, particularly in our strong repellent category. These unprecedented negative demand shocks and the unfavorable weather conditions materially reduced our planned sales for the quarter. This sharp reduction in retail orders led to our own inventory levels being higher than expected, which is in turn leading to higher demerge and detention costs as well as additional storage costs in the short term. So in response, we've taken two major actions. First, we moved swiftly to reduce our operating costs by eliminating 17% of our global salary positions during the quarter, and that will drive over $300 million of annualized savings. While these actions are difficult, it is the right thing to do to position our company for the business conditions ahead. Second, we pivoted our operating strategy to reduce our inventory levels and to run our operations to maximize cash flow instead of reported earnings. This is negatively impacting our margins and contributed to the shortfall to our original earnings outlook. In addition, we are investing in targeted advertising and promotions to help our retail partners reduce their own current inventory levels. While these difficult actions negatively impact us in the short term, we are already seeing the benefits. And because of these aggressive steps, we believe we can return to our normal operating rhythms and profitability faster. We are only six weeks away from beginning our fiscal 2023. and we want to enter the new fiscal year as lean from an expense and inventory position as possible. Additionally, from an overall pricing perspective, while we continue to monitor inflationary pressures, I would like to confirm that all of our previously planned price increases are now implemented, and we are at our targeted inflation coverage levels coming into the fourth quarter. This is exemplified by our global pet care business, where we have seen adjusted EBITDA margins improve sequentially from Q1 to Q3. In our HPC business, we have seen higher sequentially monthly profitability just in the last couple of months, with in fact the profit for the month of July in this business greater than it was the entire third quarter. Given our third quarter results, shifting consumer demand and the related retail order patterns, as well as our near term focus on reducing inventory, we are updating our 2022 earnings framework. We are now expecting mid single digit top line growth over the prior year in the fourth quarter. And we expect fourth quarter EBITDA to be relatively flat to the third quarter and very similar to the prior year period. This would imply a mid single top line digit Sorry, this would imply mid-single-digit top-line growth with a mid-20s EBITDA decline for the full fiscal year of 2022. Overall inflation remains high, but we are seeing some easing in certain areas, including ocean freight and with certain material inputs. While we expect inventory challenges to persist over the next two quarters as retailers adjust to shifting consumer sediment, particularly in HPC, We believe we are particularly well positioned in our global pet care and home and garden businesses, which are high margin, high velocity consumable businesses that have historically been recession resilient. Despite the near-term headwinds, our businesses remain competitively positioned, and our operating performance has already materially improved since we implemented the actions just described. We continue to believe that the company has an EBITDA earnings power of over $400 million. While the exact mix of business unit contribution is difficult to predict, we believe that global PEC care has the ability to generate greater than $200 million of EBITDA per year. Home and Garden can generate greater than $120 million of EBITDA per year, and our empowered brands has the ability to generate at least $100 million per year. If I could now turn your attention to slide seven, our capital allocation priorities remain consistent, but our short-term focus has adjusted to cash flow generation. In short, we are looking forward to closing the pending HHI divestiture, recapitalizing our company, deleveraging our balance sheet, and moving to a transaction to separate our home and personal care business. We are confident that the public markets are looking to invest and to allocate capital to a more pure play global pet care and home and garden company. And these actions should result in a rewriting of the valuation of our publicly traded shares. Before I turn the call over to Jeremy, I would like to thank our teams who have worked tirelessly in the face of current market headwinds and have helped make some difficult short-term decisions to prepare our business for long-term success. Now you'll hear more from Jeremy on the financials. Jeremy, I turn the call over to you.